Oil-by-rail option back on track as pipelines fill up
Rising oilsands production sets scene for a resurgence in delivery method
A looming pipeline shortage could force more barrels of Canadian oil onto rail cars over the next few years, as oilsands companies look for alternative shipping options amid a gradual rise in production.
The oil industry’s pipeline woes have eased in recent months after Prime Minister Justin Trudeau approved two major pipeline proposals, and after U.S. President Donald Trump invited TransCanada Corp. to resubmit the Keystone XL pipeline permit.
However, the earliest date of completion for any new pipeline project is about the end of 2019, if there are no delays. With oilsands production expected to rise over the next five years, and with Canada’s pipeline system near capacity, oil firms are tapping crude-by-rail once again.
“The reality is, without additional physical steel being put in the ground there will come a point where that pipeline system will be overtaken,” said Kevin Birn, an analyst with IHS Cera in Calgary.
Volumes of crude moving by rail are already on the rise. Canadian crude oil exports by rail surpassed 120,000 barrels per day in November 2016, the highest in 13 months.
Recent volumes are nearing their peak of 172,000 bpd in March 2014, when several deadly accidents involving crude-laden trains turned oil-by-rail transportation into a contentious topic, according to the National Energy Board.
The prominence of oil-by-rail transportation came as oil prices were riding high, causing pipelines to reach their capacity. Producers began expanding their rail capabilities at great expense, but oil production tapered off after oil prices crashed in late 2014. Pipeline operators also began finding ways to more efficiently move liquids through their systems, which further dampened demand for rail shipments.
Today, rising oilsands output is setting the scene for a modest oilby-rail resurgence.
GMP FirstEnergy analyst Martin King wrote in a recent research note that higher oilsands production was raising the “potential for (rail) activity to return to previous highs set in 2014.”
That is partly because analysts expect that much of the efficiencies wrung out of the Canadian pipeline system in recent years have reached their maximum.
Midstream companies such as TransCanada and Enbridge Inc. have begun moving higher volumes of liquids by replacing older pumps along their pipelines, blending various types of crude together to better utilize space or adding chemicals and lubricants that allow for better flow.
“Midstream companies’ ability to optimize that system has been very good in recent years, but it’s going to get increasingly tight,” Birn said.
The looming pipeline crunch caused several oilsands companies to buy into rail capacity as a way to diversify their customer base.
Oilsands operator Cenovus Energy Inc. moved an average 15,000 barrels per day by rail in the third quarter of 2016, up from 6,600 barrels in the third quarter of 2015.
“It does allow us to move barrels to refiners that otherwise wouldn’t be able to receive them,” said Cenovus spokesperson Reg Curren.
The company owns roughly 100,000 bpd in rail capacity, including the roughly 70,000 bpd rail terminal in Bruderheim, Alta., that it purchased from Canexus Corp. in 2015.
Imperial Oil Ltd., another oilsands operator, and its joint-venture partner Kinder Morgan, own roughly 210,000 barrels per day of rail capacity out of a terminal based in Edmonton. The companies did not divulge recent shipping volumes.
With oilsands production set to rise between 600,000 bpd and 800,000 bpd in the next five years, according to some estimates, producers have begun to show more interest in rail options.
Canadian oil production averaged 3.7 million bpd in 2015, according to the Canadian Association of Petroleum Producers. But that number could reach as high as 5.2 million bpd by 2021, according to projections from the International Energy Agency.
“People have been calling us, hedging their bets,” said John Zahary, the CEO of Altex Energy Ltd., an oil-by-rail logistics firm.
The reality is, without additional physical steel being put in the ground there will come a point where that pipeline system will be overtaken.